TELECOMS: Unicom Seeks New Life with BAT Magic

Bottom line: Unicom is likely to choose all 3
of the BAT companies as equity and strategic partners under
Beijing's pilot program to invigorate big state-run companies, but
none of the tie-ups will produce meaningful results.

Unicom eyes BAT partnerships

China Unicom (HKEx: 762; NYSE: CHU), the perennial
laggard among China's 3 major telcos, is reportedly looking for new
life by tying up with the nation's big 3 Internet
companies, Tencent (HKEx:
700), Alibaba (NYSE: BABA)
and Baidu (Nasdaq: BIDU). I might normally say "so
what?" to this particular development, since it seems like Unicom
and its 2 fellow state-run telcos are regularly announcing this
kind of partnership, always with little or no meaningful impact on
their business.

But this time is different, as Unicom may actually sell a stake in
itself to one, two or all three of China's largest Internet
companies, sometimes collectively referred to as BAT. Unicom was
chosen a few months ago to participate in Beijing's fledgling
public-private partnership program, which aims to breathe some
entrepreneurial spirit into big state-run firms by selling stakes
in them to more nimble private companies.

The program certainly looks good in theory, as state-run giants
like Unicom are perennial dinosaurs, moving slowly and often only
making major changes when prodded by their industry regulator. But
the reality is that Unicom is a bit of a management basket-case,
which in my view has made it the least attractive of China's big 3
telcos. Until it can fix that problem, I really don't see any major
room for improvement at the company, even if it sells small stakes
to better-run partners like the BAT.

All that said, let's take a look at the latest developments, which
began with rumors this week that Unicom had finalized a plan after
being selected to participate in Beijing's public-private
partnership program. The rumors said that one or more of the BAT
were part of the proposal. (English article; Chinese article) Unicom responded by issuing its own
statement, saying that its pilot plan had yet to obtain final
approval. (company statement)

Observers have interpreted Unicom's statement to mean that an
actual plan has been crafted, and is now in the final stages of
discussion with Beijing, which may ask for changes before giving it
the final green light. Unicom has announced major new partnerships
with all 3 of the BAT over the last few months, leading observers
to speculate that each of those will serve as the basis for future
collaboration under a final public-private plan.

Failed Marriages

This actually wouldn't be the first time Unicom has found a
strategic partner through cross-ownership. The company previously
counted South Korea's SK Telecom (Seoul: 017670)
as a strategic partner, and sold a stake of itself to the telco.
More recently it sold 10 percent of itself to
Spain's Telefonica (Madrid: TELF). But neither
partnership ever produced any meaningful results, and SK Telecom
sold off its entire stake, while Telefonica currently holds a tiny
1 percent after selling off most of its holdings. (previous post)

Unicom wasn't the only one to try such a partnership, as industry
leader China Mobile (HKEx: 941; NYSE: CHL) also
tried a failed equity tie-up with European
giant Vodafone (London: VOD). All of those
pairings failed because the Chinese telcos had no real interest in
serious collaboration, since they operated in a highly protected
home market where they had little or no incentive to improve.

Fast forward to the present, where the regulator is trying hard to
change the telcos' moribund mindset. It has rolled out a virtual
network operator (VNO) plan that allows private companies to offer
wireless service by leasing capacity from the big 3 telcos. It has
also formed a fourth new telco by merging most of the nation's
local cable TV companies. But none of those plans seems to be
having much effect, at least not yet, and the big 3 telcos still
aren't feeling much pressure to improve.

All that brings us back to the question of whether the reform plan
will succeed where previous Beijing efforts to invigorate the
industry have failed. As I've said above, I really doubt this plan
will have much effect, even though all of the BAT are far more
nimble and innovative than Unicom, or any of the other telcos for
that matter.

The bottom line is that Unicom is a very poorly managed company,
and it is only participating in this program because it's being
forced to by Beijing. Since it has no choice but to go along with
the plan, it's trying to draw as many big names into its scheme as
possible, most likely to draw attention to itself and perhaps pump
up its share price. But little or nothing will change at the end of
the day, and these new partnerships will end up mostly as empty
gestures.